The Untapped Power of Pricing

By Philippe Morel

How many prices and fees does your institution have for its products and services? Hundreds? Thousands? By how much could you raise prices in some areas without hurting volume, or lower them in other areas and lure customers from your competitors? Most important, do you have a process in place to help you answer these questions and then move quickly and strategically to capture value?

The truth is, prices in most financial-services companies evolve reactively on the basis of management hunches, competitors’ moves, and the pressures of sales targets. They are not usually determined through deep knowledge of different customer segments and their price sensitivity toward various products. The result is often a fragmented set of price mechanisms and price levels that either leave money on the table or drive customers to lower-cost providers.

The Boston Consulting Group’s view is that most financial-services institutions could better utilize pricing as a tool to increase earnings and market share. Indeed, of all the ways managers can affect the bottom line, pricing can be the most powerful. A recent BCG analysis of retail banks, for example, revealed that if aggregate prices were increased by just 1 percent, with volume and costs remaining constant, the result would be a 6.8 percent increase in return on equity. By contrast, a 1 percent increase in volume or a 1 percent decrease in costs would raise ROE by just 1.8 percent and 2.3 percent, respectively. The dynamics are similar in the fund-management and insurance industries. Unfortunately, financial institutions’ information systems are rarely set up to assemble and analyze the type of customer-response and competitive positioning information required to make good pricing decisions.

The penalties for poor pricing can be severe. Losing just a small percentage of your best customers—or failing to capture fully their willingness to pay—can hurt profits dramatically. What is more, efforts to improve pricing usually pay off handsomely. Companies that have made pricing a strategic priority have seen profits on certain products increase by up to 25 percent. The key is to recognize that the power of pricing often goes untapped and to figure out how to make it work better for you.